Through confidential interviews with senior representatives from 20 of the 25 top institutional investors based on management of U.S.-based equities, the Center on Executive Compensation determined that the top issue of concern was ensuring pay-for-performance, followed by preserving the Boards’ role to set compensation, being able to “trust” and rely on compensation committees and seeking greater clarity in both a company’s pay disclosures and the SEC’s requirements.
The study also found large institutional investors do not have a shared view on all executive compensation issues. “While they agree about some issues, such as favoring pay for performance and rejecting “say on pay,” they are almost evenly split on others, such as the necessity of maintaining the independence of the compensation consultant and disclosure of performance targets,” stated the Center in its summary of the findings, according to a press release.
Some of the Center’s findings, according to the announcement, include:
- The majority of large institutional investors do not support a shareholder vote on executive compensation, believing instead that boards should be responsible for compensation decisions and held accountable through greater disclosure and ultimately by shareholders who determine whether to reelect them;
- Large institutional investors are not generally concerned with the level of executive compensation, provided it is clearly and appropriately linked to company results; however, they believe the pay-for-performance link could be further strengthened and unanimously support equity as a form of aligning executives and shareholders’ interests;
- One-third of the large institutional investors raised unsolicited concerns over the influence that proxy advisory services have over the proxy voting process, including compensation matters;
- Despite updated SEC disclosure rules, the overwhelming majority of large institutional investors has been disappointed in the rules and how companies have implemented them, especially the lack of clarity in the Compensation Discussion and Analysis. The investors believe there is room for improvement and that it will occur over time. In the meantime, they do not support a “one-size-fits-all” approach to selecting or determining performance metrics, instead preferring multiple performance metrics tailored to measure the achievement of a company’s strategic goals; and
- Large institutional investors were split on the issue of the independence of executive compensation consultants, with just under half supporting independence and the others divided between disclosure of other relationships with the company and those not seeking any disclosure.
“Given the top 25 institutional investors’ massive representation of investors’ interests, we believed that the views of this important shareholder constituency should be better understood and factored into the ongoing national dialogue about how best to inform and structure executive pay practices and the rules and regulations that guide them,” said Charles G. Tharp, the Center’s Executive Vice President for Policy, in the press release.
More about the study is at http://www.execcomp.org/papers/iireport.aspx .